This summer, the Securities and Exchange Commission (SEC) approved final Dodd-Frank clawback policy listing requirements for both the NYSE (NYSE Listed Company Manual Section 303A.14) and Nasdaq (Nasdaq Listing Rule 5608). The listing standards provide that these compensation recovery policies apply to compensation received on or after Oct. 2, 2023, but listed companies have until Dec. 1, 2023, to adopt compliant policies. We summarize the key requirements of the policies below and recommend actions for publicly traded companies to implement the policies.
Clawback policy key terms
Highlights of the requirements of a compliant policy are below:
- Issuers covered. All issuers, including foreign issuers, whose stock is traded on a U.S. securities exchange, must adopt policies.
- Officers covered. All Section 16 officers, including the issuer’s CEO, CFO, PAO, unit vice presidents and all other policy making officers, must be covered by the policy.
- Clawback trigger. The trigger for recovery is an accounting restatement, including both “Big R” and “Little R” restatements, that result from the material non-compliance with financial reporting requirements. Recoupment is required regardless of fault.
- Compensation covered. The clawback policy must apply to all incentive based compensation received by an executive officer during the three fiscal years immediately preceding the date of a required accounting restatement. Such compensation is defined as any compensation that is granted, earned or vested wholly or in part upon attainment of a financial reporting measure. Financial reporting measures include measures derived directly from the financial statements as well as measured based on stock price or total shareholder return. They do not include subjective measures (such as leadership) or purely time-based vested awards. Compensation is considered “received” on the date the reporting measure was attained, even if the compensation was paid later.
- Amount subject to clawback. The amount of “erroneously awarded compensation” that must be recovered under the policy is equal to the amount that the incentive compensation received, or exceeds the amount that would have been received had the compensation been calculated based on the restated amounts, regardless of taxes paid.
- Disclosures. Issuers generally must file their clawback policy as an exhibit on the Form 10-K. Further, if the issuer must prepare an accounting restatement in the future, it will have additional disclosures related to how it implemented the clawback of incentive-based compensation under the policy.
- Indemnification. Issuers are prohibited from indemnifying executives from the recovery of erroneously paid compensation.
Next steps for public companies
Publicly traded companies should consider taking the following steps to coordinate implementation of the new clawback policies:
- Revise current policy or create a new policy. Many issuers currently have a clawback or recoupment policy. One approach may be to revise the current policy to the extent necessary to comply with the new requirements. If the current policy covers a much larger group of employees than the Section 16 officers, the issuer may want to create a separate policy that complies with the new requirements. Early indication is that most companies are choosing to create a separate policy.
- Have covered officers sign an acknowledgment of the policy. The clawback policy could apply to incentive compensation awards that were granted in prior year. Rather than amend every prior award agreement, issuers could require covered officers to sign an acknowledgment that they have read and understand the policy. A signed acknowledgment can both make the policy enforceable and alert the officers that any clawback will not be indemnified.
- Amend plans and agreements for compliance. If an issuer’s executive compensation plans and employment agreements do not refer to a clawback policy, the issuer should amend these documents to make clear that they are subject to the policy. Any indemnification arrangements also should be reviewed to make sure they do not violate the policy.
- Update compensation practices. Administratively, trying to recover compensation up to three years after it has been paid could be difficult. To make it easier to recover compensation, an issuer may want to consider changing its compensation practices. For example, an issuer might require mandatory deferrals of performance-based pay or additional time-based vesting conditions on awards. That way, recoupment would involve simply reducing the amount of compensation due at a future date rather than recovery of a previously paid amount.